A producer is said to be in equilibrium when he produces that level of output at which :
(a) MC = MR
(b) MC > MR after the MC = MR output level
Explanation to the conditions:
Condition – 1 MC = MR
Suppose when a producer starts producing a good, with the given factors and finds MR > MC he goes on producing because every new unit produced adds to profits.
As he goes on producing he may face the output level when MC = MR and this output satisfies MC = MR condition of equilibrium.
Condition - 2 MC > MR after the MC=MR output level After MC = MR level, if MC > MR, every new unit produced is sold at a loss. So, he would not like to produce more units.
Therefore, only that output level at which MC = MR, and beyond which MC > MR, is the producer'* equilibrium.
Detailed answer :
A producer is said to be in equilibrium when he maximises his profits or minimises his losses. There are two conditions of producer’* equilibrium :
(i) MC = MR
(ii) MC is greater than MR after equilibrium The conditions are fulfilled at point E in the diagram
Explanation :
(i) So long as MC is less than MR, it is profitable for the producer to go on producing more because it adds to profits. He stops producing more when MC becomes equal to MR.
(ii) When MC is greater than MR after equilibrium it means producing more will lead to decline in profits.
